Markets
Mahindra Finance sets healthy pace in May, but risks remain
Summary
The company’s monthly operational update for May brings cheer with disbursements rising almost 40% year-on-year and 10% sequentially to ₹4,150 crore.Shares of Mahindra & Mahindra Financial Services Ltd (Mahindra Finance) have been scaling new highs frequently over the past few months. The stock hit a new 52-week high of ₹304 apiece on Monday. The company’s monthly operational update for May brings cheer with disbursements rising almost 40% year-on-year (y-o-y) and 10% sequentially to ₹4,150 crore. Healthy loan disbursal and stable collections have led to a 3.3% rise in assets under management over March to ₹85,500 crore.
“May’23 disbursement volumes reported by Mahindra Finance indicate robust demand and strong business volumes contributing to healthy disbursement growth for Mahindra Finance as well as other vehicle financiers," said Motilal Oswal Financial Services’ analysts in a note.
The company has been diversifying its business to include different loan segments such as SME financing, personal loans, and pre-owned vehicles that usually have higher yields. But analysts caution that net interet margin (NIM) would come under pressure in FY24 due to rising cost of funds. In FY23, NIM stood at 7.6%. Mahindra Finance expects to maintain its NIM at 7.5% level under its mission 2025 plan. .
Further, Mahindra Finance is diversifying its customer base to cater to affluent rural and semi-urban customer segments to improve asset quality. Here, management targets to maintain gross stage-3 to less than 6%. In this backdrop, the company has said its stage-3 and stage-2 assets continued to be range-bound in May versus March. Note that gross and net stage-3 assets stood at 4.5% and 1.9% in March quarter of FY23.
However, analysts caution that a bad monsoon could spike the non-performing assets (NPA). “The status on asset quality depends on how monsoon will play out this year. In case of any deficit rainfall, rural incomes could see a slowdown, which could create NPA issues for the company. Thus, it rem-ains to be seen if the company can sustain performance," said Bunty Chawla, AVP (BFSI), IDBI Capital Markets & Securities.
That said, the company’s focus on risk management and improving customer base mix would hold it in good stead. To be sure, investors have rewa-rded Mahindra Finance’s thrust on maintaining asset quality and improving profitability. In the past year, stock has gained as much as 60%. Hereon, impact of monsoons on the company is crucial. Potential slowdown in vehicle demand is a risk. Even so, large upsides may be capped. “At 2.1x FY24E book value, risk/reward appears balanced given 13-14% return on equity outlook over FY24-25E," said Jefferies India analysts in a 2 June report.
